H&r Block Faces Fine

Role In Trade Scheme Results In $500,000 Penalty

H&R Block Inc., the biggest U.S. tax preparation company, was fined $500,000 for helping a hedge fund customer hide "market-timing" trades at the expense of other investors, the NASD said Tuesday.

Block also will pay $325,000 to reimburse the mutual funds, said the NASD, formerly known as the National Association of Securities Dealers.

Block, through the actions of two brokers in an office in Orlando, was accused of helping the unidentified New York hedge fund client make 64 improper trades.

"The deceptive market-timing practices found in this investigation do more than just violate securities regulations -- they have a profound negative impact on investor confidence," NASD Vice Chairman Mary Schapiro said. In settling with the NASD, Kansas City, Mo.-based Block neither admitted nor denied wrongdoing.

Market-timing abuses lie at the heart of a mutual fund scandal that roiled the $7.7 trillion industry. The practice raises transaction costs and dilutes gains for ordinary shareholders. Regulatory probes have led to about $3.1 billion in penalties, restitution and fee cuts in the past 16 months.

Block said the settlement would not have a significant impact on the company's operations.

"The trading in question was isolated to two former financial advisers who executed unsolicited trades," Brian Nygaard, president of H&R Block Financial Advisors, said in a statement. The firm had no special arrangements with mutual funds and took steps to stop the trades as soon as it learned of them, he said.

Market-timing trades seek to profit from the fact that mutual funds are valued once a day at 4 p.m. New York time while the securities they own trade more frequently around the world. They involve buying a fund's shares and then quickly selling them, hoping to take advantage of differences in price.

The NASD alleged that Block recruited and hired the two brokers knowing they were going to open accounts for hedge funds that planned to market time in mutual funds.

Between October 2002 and July 2003, the firm received 44 letters from mutual funds that tried to block further trading after they noticed the frequent activity by the same accounts, the NASD said.